We Don’t Know What Brexit Means for Airlines, But It’s Not Good

Brexit! I apologize to all my British readers for showing so much excitement, but please know that I did restrain myself from adding a second exclamation point. Still, if anything is worth two exclamation points, it’s the fact that you all in the United Kingdom (not just Great Britain, despite the Brexit name) have decided to leave the European Union (EU) and take your talents to South Beach. Wait, that’s not right. You’re not taking your talents anywhere. You’re keeping them where they are and building a virtual wall around them. I’m like everyone else in wondering what exactly this means for the world, and of course, I want to know specifically want it means for the airline industry. It’s too early to know, but there isn’t a scenario I see where things come out better for you than they are today. And yes, it could get worse.

From an economic perspective, there’s one thing we do know for sure… it is really cheap to visit the UK right now. With the British Pound tanking to levels vs the US Dollar we haven’t seen in 30 years, now is the time to go to the UK and get a great deal. This sounds great for tourism, so huzzah for that. But let’s temper that enthusiasm. Inbound arrivals only account for about a third of all UK air travel. Those other two-thirds are outbound travel, and things just got a lot more expensive for those trips. Even worse, this move is expected to reduce economic output and could push us all into a recession, in theory. That’s not good news for air travel.

Talking about the money isn’t nearly as much fun as toying with the idea of how this will go from a regulatory perspective. We really know absolutely nothing about that. When the UK officially files the paperwork to pull out of the EU (probably later this year, assuming the then-primer minister doesn’t get cold feet), there will then be a 2 year process to get the country out. It’s going to make a lot of lawyers rich, I’m sure. What we don’t know is what the terms of this divorce will be, and that’s what really matters to the airline industry.

Today the UK is part of the European Common Aviation Area (CAA). That means that UK-based airlines can fly anywhere within Europe they want, just as if they were based in any of those other European countries. The same goes for European airlines flying within the UK. It also means that bilateral agreements negotiated by the EU with third parties outside the EU apply to the UK. And there are a host of European aviation regulations that govern air travel in the UK as well. Some or all of this may go away completely when the break-up occurs. That is to be determined by those negotiating the terms.

The big issues fall into two categories.

Air Travel Between the UK and the EU/Within the UK/Within the EU
Today the UK is in the EU and therefore part of the CAA. There are no foreign ownership rules restricting who can own what when it comes to flying around Europe. You would think the UK would like to maintain this going forward, and there is precedent. Norway is one of several non-EU countries that are a part of the CAA, so you’d think the UK might be able to remain. Or could it?

Many of those voting “leave” had this sense that the EU was telling the UK what to do and how to do it. There were all these absurd examples showing how the EU over-regulates everything. Well, guess what? If you want to be a part of the CAA, then you have to abide by EU aviation rules. That’s the way it works. Will the UK be willing to make itself subservient to those rules in order to retain the existing air service situation?

More importantly, will the EU allow it? The EU has made it clear that with this vote having been finished, it wants to get the UK out quickly to reduce uncertainty. But an even bigger concern is that other nations follow in the UK’s footsteps. To prevent that from happening, the EU may decide it doesn’t want the UK in the CAA anymore. That would be quite the blow to the UK, but it would be a warning shot for anyone else contemplating the same thing. I keep coming back to that castle scene in Monty Python and the Holy Grail.

That would mean that the UK and the EU would need to set up a more traditional bilateral agreement. It would be shocking if those restrictions didn’t include a ban on UK-based airlines from flying within the EU. That would mean foreign ownership rules would apply. For EU-based airlines this wouldn’t be a huge issue. They’d probably lose the ability to fly domestically within the UK and they couldn’t be majority-owned by a UK shareholder anymore. That’s not really an issue.

For the UK, however, it’s bad news. Think about easyJet, a UK-based airline that criss-crosses the EU all day every day. It would no longer be able to do that. Instead it would be forced to create an EU-based subsidiary, of which it could presumably only own 49 percent, and then have that company handle the intra-EU flying. Half the profits of that company would go into the EU instead of to the UK as they do today. The airline is already investigating this possibility. This wouldn’t hurt easyJet other than adding a little more complexity, but it would hurt the UK.

Then there’s IAG, the parent of British Airways, Iberia, Vueling, and Aer Lingus. This one is a tough one. See, IAG is technically a European company so Iberia, Vueling, and Aer Lingus wouldn’t have any issues, particularly since I don’t think they do much, if any, flying within the UK today. But British Airways, technically being a European company, wouldn’t be able to fly within its homeland. There are ways to solve this. BA could be spun off into a separate company that’s half-owned within the UK. Maybe a new BA UK subsidiary could be set up that would just operate the domestic routes with the rest remaining in Europe.

Either way, the EU doesn’t stand to lose anything significant by refusing to allow the UK to remain in the CAA. Further, it would send that important message to other countries not to think about leaving.

Air Travel Between the UK and the non-EU Countries
As if flying within Europe isn’t a big enough issue, then there’s the issue of flying from the UK to other places around the world. The EU has taken over the process of negotiating bilateral agreements. With the US, for example, it’s the open skies agreement with the EU that governs all. That agreement does have some signatories who aren’t EU members. Again, Norway is a good example. But this could be another place where the EU tells the UK to go pound sand. If the UK isn’t allowed to stay in the agreement, then it gets interesting.

That means the UK would need to negotiate bilateral agreements with all the countries that fall under EU agreements today. Considering the EU wants the UK to get out quickly and the UK would be busy writing its own regulations to replace those from the EU, it’s not hard to imagine that the UK would be unable to negotiate new agreements with these other countries before it leaves the EU. Then what?

If the EU won’t let the UK in on its agreements, then presumably the UK would fall back on the last agreement it had with each country until it could negotiate new ones. With the US, this would be a complete disaster. The last round of agreements had Heathrow heavily restricted with only American, United, BA, and Virgin Atlantic allowed to serve the airport. There is no way that the UK can go back to this without causing complete and total chaos. It would be so bad I just can’t imagine it happening, but with the UK needing to do so many things before exiting the EU, it’s hard to know what will take priority. There are so many places where things can go wrong.

In the best case scenario, things stay as they are. Let’s all hope calmer heads prevail and that’s what happens. But in the end, there is only downside potential here. The people of the UK have voted to build virtual walls around the country. While I can understand the sentiment that leads to a vote like this, it’s bad for air travel (and yes it’s bad overall as well). Let’s hope other countries around the world (or, say, in North America somewhere between Canada and México) don’t make similar mistakes.

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“it’s the fact that you all in the United Kingdom (not just Great Britain, despite the Brexit name) have decided to leave the European Union” – I know it’s a turn of phrase, Brett, but believe me, we didn’t ALL vote for Brexit.

I’m aware of the implications for air travel, both within and outside the UK/Europe, but at the moment I’m more disgusted by the completely uncloaked racism and xenophobia that, somehow, has been allowed to be openly displayed. This is the country I was born in to, and these are not values I wish my children to be surrounded by.

“while not everyone who might vote “Leave” is an appalling racist and/or low-information nationalist, it’s pretty clear that nearly every appalling racist/low-info nationalist is voting “Leave,” and that the people engineering the Leave vote are perfectly happy to leverage those folks to get what they want. If you find yourself on the same side as appalling racists/ignorant “patriots”, you might ask yourself why, and additionally whether you might be more appalling and/or ignorant than you’d like to admit.”

Bobber, FWIW its useful to have that racism and xenophobia uncloaked so it can be addressed. If its under the surface it can grow and fester.. (I saw Moisés Kaufman say as much regarding Fred Phelps and LGBT people.)

But to pull it back around to the airline business, the UK just had a moment like Jetblue in the Valentines day 2007 snowstorm. Jetblue had problems that they didn’t know that they had, and those problems just blew up in their face.

Bobber – I rarely get political on the blog, but… I agree with Alain’s quote, and the same can be applied to Trump supporters in the US. For many people, it’s rooted in the fact that they can’t get jobs, or some other big problem that the current government isn’t addressing. Those are the people who I feel sorry for, and I wish that more mainstream politicians could do a better job of addressing those issues. But at some point, when nobody is addressing them (even through empathy), people turn to the only place that is trying to help… even if it is full of racists and xenophobes. That’s when you know people are getting desperate, and unfortunately rational argument doesn’t work after a certain point.

Except the nightmare scenarios you describe only occur if the protectionist club of the racists and xenophobes against the British, those that Remain in the open and enlightened EU, build the virtual walls out of spite. There is no reason, but when you are dealing with governmental power and control reason goes out the window, that this should not go smoothly. Kill the EU government but save the common economic zone; that would be better advice for the Divided States of ‘merica as well.

Pre-Maastricht Treaty, European Economic Community-type organization with limited supra-national capabilities. It’s sort of what NAFTA is. There are criticisms of NAFTA (and the EEC) from left and right, but that is not what put BREXIT over the top. The winning margin was provided by post- Maastricht critics. If the EU were smart, it would take those criticisms as legitimate. Instead, it will cry racist, be punitive against UK, and collapse completely.

Free movement of people within the EU borders is a big deal, and I don’t think that existed before Mastricht (or within NAFTA). Imagine people in the US couldn’t freely move between states. Want to move from Seattle to San Francisco for a job – apply for a California Work Permit and Visa?

I’m learning a lot here, but it looks like free movement started before Maastricht (Treaty of Rome in 1950s), and Maastricht doesn’t control but Schengen does, which UK already incorporates differently and to which non-EU states like Switzerland and follow. I think an economic union should allow free movement, whether in Europe or North America like the US. I was using NAFTA as shorthand: the closer EU is to NAFTA and further from Chinese National People’s Congress the less likely it will canabalize the good aspects like freer trade and movement without having to adopt totalitarian mechanisms of coercion. To brand all Brexiters as racists is wrong; some people may have voted for it because they’d prefer to be more like Switzerland.

You are right; there were earlier rights (pre-Maastricht), but if I read it correctly, Maastricht consolidated and expanded upon them. It seems, in particular, that being financially self-sufficient or retired is a new category allowing settlement in an EU country.

It seems the main concern about immigration in the UK was about movement of workers from new EU member countries in the east (Poland, Romania?). Imagine if CA disallowed movement of people from, say, the east coast to “protect” California workers and culture.

I think people being able to move and settle freely within Europe is a major contributor to stability on a continent that for centuries has been unstable.

GhostofChurchill – Good question, and one which can’t be answered yet. Certainly the chunnel is a way that immigrants have tried to get to the UK so I would imagine something would be done to stiffen that border. Though whether that would impact Eurostar services or not is unclear.

While it unclear how it would shake out, it is apparent that France is no longer interested in being the border patrol for the Chunnel, nor allowing UK customs and immigration officers to have jurisdiction on the other side of the Chunnel. This would result in the flow of immigrants to continue onward to the British side where the UK would have to deal with it. While that treaty is separate from the EU, politically speaking it’ll be hard for France to justify why it should be picking up the tab for a country that is not in the EU.

I think you mean EASA not CAA ( UK ) ; EASA is the european body ( and we have other countries in there which are not part of EU there ) ; CAA ( UK ) is just a national body for which is a member of EASA

Cranky, one of the things that I like about your blog is it’s fairly non-political. I think you tried valiantly to keep today’s topic neutral (aside from saying Brexit is “not good”) but given the comments I think it’s a fair bit too soon to discuss. For one, the vote is just a couple days old. The dust hasn’t settled, and like all things it’s nothing but horror stories from both camps until things settle down. Secondly, at this point everything is speculation. While that’s fine speculation over a politically charged topic tends to reduce the discussion to charged words.

I think the airline issue is merely a sideshow, and maybe a consequence of the exit decision. The result was triggered by people mainly outside London (with the exception of Scotland which has a completely different scenario), who are disaffected with the political establishment, the banking industry and also the European Union rules and regulations which are continually imposed on the UK. Politicians and business people on both sides resorted to outrageous statements and claims which didn’t ring entirely true with the voters, and post-result, many are now backtracking on this comments. The only people they can trust are the ones they can see and elect, or deselect as the case may be. My old boss said if you get communication and training right, you can do anything. In this case the way everyone communicated, no matter what your preference, brought about the result.

I don’t think the people of Britian knew what they were really voting for, just like people in the USA don’t know what they are voting for.

Who knows, maybe the governement took some steps and planned ahead and already have written plans in case this ever happen, so it would just be a matter of dusting them off and going forward quickly with it.

But as I read in the newspaper with this 2 year period, and sides having to agree or this and that, it could never be that the UK really leaves the EU.

Oliver – Well since IAG is a European company, I’d think it would be fine. But it’s part of BA (I think), so if BA becomes a UK company, then Open Skies might very well have to be moved under a different subsidiary. Or they could just kill it.

As for Norwegian, well, it has applied for a UK license and is currently waiting for the US to say ok. Presumably that’ll all be worked out long before the UK exits.

This, of course, is all dependent upon the terms of the agreement being known.

Other way round. BA is a wholly owned subsidiary of IAG, and has a UK Air Operator’s certificate. There may be ownership implications for IAG; it calls itself joint British-Spanish but the official company name is International Consolidated Airlines Group SA (SA is the Spanish equivalent of Inc) but BA is British, and its other subsidiaries are Iberia and Vueling (Spanish AOC) and Aer Lingus (Irish).

I’m more concerned about who owns it. It’s easy enough for IAG to get an AOC wherever it needs it. It’s harder if it requires changing ownership.
BA may have an AOC from the UK, but that won’t be permitted without modifications to the ownership structure if foreign ownership rules go into place.

The UK was never fully “in”. Kept the pound, and still sells pints. I had a $600 lesson last year. I was in England with my wife and stepdaughter (US citizens). I booked a day trip to Amsterdam for my stepdaughter on Easyjet. She was denied boarding in MAN because her US passport only had a month of validity left. Enough to get into the UK. I mistakenly assumed that the “free travel” within the EU included between MAN and AMS. Easyjet knew of the passport validity (we had to enter it on the website for the booking) and took my money, but refused to refund it afterwards, with the usual “you are responsible for documents”. So the same company that was aware of the AMS passport validity requirement at boarding time was apparently unaware at booking time. So I lost two airfares and hotel bookings. So much for free travel. You can imagine how little sympathy I would have for Easyjet’s impending operational issues.

I did not vote, but my mum did. She is neither racist (married to an Asian, my father) nor xenophobic. She was just tired of being at the mercy of German and French influence with little discernible upside. Apparently, she was in the majority with that opinion. While politicians and academics may think they know better, this was a reminder that they should remember the “serve” part of their job descriptions.

We arrived in the UK one week before. I had checked the UK Border rules on passports before the trip, in case we needed to get a new passport. The rules said validity had to extend beyond the departure date. She entered with no problem. So, not really fully “in” the EU. If they were, it should be as easy to travel from the UK to France as it is from France to, say, Belgium.

But you make a good point – had she made it to AMS, I wonder if there would have been issues on the return? I also wonder what would have happened if she had taken another route – the Eurostar, or a ferry – do they check passports on North Sea ferries?

Yes, thanks for that, I am beginning to get it. What an administrative nightmare, with EU & Schengen rules. I understand now why my British relatives ask me if they need their passports for a trip from the US mainland to Hawaii. If the EU were running the show, you would need it if you were travelling from Wyoming, but not from California. Driving from Georgia to Florida would require an “exit check”. US airports would need separate admin for “domestic” flights to Schengen and non-Schengen states – and customs checks so you don’t take your high-powered hair dryer to an EU state. The “U” in EU apparently doesn’t mean what I think it means, to paraphrase The Princess Bride.

If US LHR access did revert to Bermuda II, it would be problematic but not as bad as it was when it ended. CO, NW and US are no longer around to lack access to LHR, and DL could quickly reallocate some airplanes to VS and have VS fly the entire US-LHR operation. It would be tricky and might annoy some of Delta’s labor groups, but it would more or less keep the status quo intact.

Of course, given Delta’s propensity to start a fight these days, they’d probably try to argue that they deserve LHR access moreso than one of AA or UA do, though I’m not sure how far they would get with that argument. There was some precedent for changing the owners of LHR access under Bermuda II, with AA and UA having taken over TWA and Pan Am’s original allocations, but that was a voluntary sale, which presumably AA and UA have no interest in offering now. But it’s not clear, since Bermuda II is no longer in effect, if AA and UA even still have a default right to preserve the positions they had under that arrangement.

Would some of the routes that didn’t exist at the time of Bermuda II have to be suspended (eg BA to San Jose) or did it only “bite” at the London end?
Agree Delta would reallocate most flights to VS but if the answer to my first question is “yes” then suspect they’d have to move Atlanta back to Gatwick (as would BA).
The real problem is the fact that we have to spend time wondering and questioning, as the uncertainty means less investment.

Bgriff – I think the Delta pilots might have something to say about moving all the flying over to Virgin Atlantic. That’s unlikely to be allowed, and there’s probably not much incentive for them to agree to it anyway.

Still, I think this is likely to all be moot. Something will have to be figured out.

Bermuda II wasn’t open skies. Without open skies, joint ventures aren’t normally allowed to exist. So if Bermuda II became the active treaty again, wouldn’t the BA/AA and DL/VS joint ventures have to break up? In that case, DL transferring flying to VS isn’t an option, irrespective of pilot issues.

Obviously, this is uncharted territory, so I’m not sure anyone knows what would happen if open skies between the US and UK do go away overnight.

I agree that this is fairly unlikely, but if Brexit does happen, the UK has to negotiate treaties to replace essentially their entire trade framework with the entire world, doing decades of work in two years. Some things won’t get done that quickly, and I sure don’t want to predict what gets done and what doesn’t..

Whatever happens within Europe, you can bet your bottom Euro that the US and UK will sign their own open skies agreement. With American’ JV with BA and Delta’s with VS at risk, they’ll be lobbying the DOT/DOJ for an agreement asap, with IAG and Virgin (and Norwegian) lobbying the UK government.

I’d expect United to support this too, as their coordination of schedules and fares with Lufthansa at LHR and their revenue share on UK routes is at risk. Even though United would “benefit” from not having to share its US-UK revenues with LH, they need their JV to work and LH not to suffer.

I’m particularly curious about the impact on IAG. It’s not just the intra-UK flights that are impacted… unless the UK and EU negotiate fifth-freedom rights into their new bilateral, European airlines (of which BA is currently one) couldn’t fly between the UK and third-party nations. That would mean BA’s entire long-haul business would be shot.

I think the big wildcard here is going to be how punitive the remaining EU countries are in the exit negotiations.

Scott – Yeah, they’d have to make it a UK-based company, most likely, and bring on majority British ownership. But I agree with your last point – it really rests on the EU and how it’s feeling about this.

I dont think much will change. They arn’t going to allow a situation where delta has to stop flights to LHR. If bilateral agreements need to be renegotiated the USA will be one of the first done and it will likely be status quo. The issue with IAG is a much trickier problem. Worst case never happens, both sides stand to loose big if they allow this to become an economic disaster. With a huge trade deficit between the UK and the EU, the EU cant just tell the UK to pound sand or they will do alot more damage.

Maybe I could remind everyone that the referendum resulted in a majority for leaving the EU. Not Europe. Not the world. Just the unaccountable EU. Oh – that’s a majority of the 30m or so voters, so convenient ‘racist’ labels are just a bit – what – stupid? Would Americans vote to have their country run by, say, Russia? Didn’t think so. Relax – it’ll be fine. (And the £ was overvalued anyway.)

That’s being pedantic. By voting to leave the EU, the legislative and economic body that encompasses overwhelmingly the vast number of continental countries, you ARE “leaving Europe.” That would be as if a state were to secede from the US Congress and the national US market and yet claim that it wasn’t really “leaving America.”

One could argue the wisdom of this, as has been going on and is happening right now, but let’s be clear. The Leave campaign sold people the idea that they could no longer pay dues, ignore or significantly buck regulatory rules, and deny freedom of movement and yet somehow get single market access and carte blanche favor for UK workers in the EU. That’s a fantasy, and the reality is that the UK will abide by EU regulations (as no one is going to make products that only serve the British market alone), jobs and businesses requiring EU financial passport rules will move to the continent or Ireland in order to sustain that access leaving only purely British representation in England, and any retaliation against EU citizens with a point scheme will result in the EU firing back with similar restrictions towards UK citizens.

Cranky,
British Airways is a UK airline, with a UK Air Operator’s Certificate. It doesn’t have to become British, it already is and always has been. Just as Iberia and Vueling are Spanish (Spanish AOC) and Aer Lingus Irish. OpenSkies has a UK AOC, so that would be an issue, but presumably IAG could switch that to an Iberia subsidiary or more likely Aer Lingus.

The world doesn’t revolve around open skies agreements; outside the ECAA and the EU-US agreement the vast majority of air access agreements between Europe and the rest of the world are still the old bilaterals between individual countries. That’s why Norwegian is starting a UK subsidiary with a UK AOC; to take advantage of UK bilaterals to Asia, notably Gatwick-Bangkok, which they can’t operate under Thai-Norway bilaterals.

Ownership within IAG may become an issue, and yes there are big implications for many airlines, but that’s nothing to do with BA’s country of registration.

Well, it’s not that complicated. The British Isles (UK and Ireland) argument for being outside of Schengen is that there is no land border (except the Chunnel), so it’s easier to do compliance checks for air and sea travel for everybody. The US analogy would be needing identification to get from the mainland to Hawaii or the mainland to Puerto Rico, but not when traveling within Hawaii, within the lower 48, or within Puerto Rico. (Of course, you need identification for air travel anyway, so it’s not much extra burden.)

It is certainly true that “U” in EU means a lot less union than “U” in United States. The EU is a collection of sovereign nations. Despite the many ways in which it is a union, it’s fundamentally different than the US.